BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:   April 27, 2015


                   ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION


                                  Adam Gray, Chair


          AB 1233  
          Levine - As Amended April 15, 2015


          SUBJECT:  Distilled spirits manufacturers:  licenses:  sale on  
          premises tastings


          SUMMARY:  Would allow a licensed distilled spirits manufacturer  
           to sell up to 3 bottles of product  authorized to be produced or  
          bottled by or for the licensee to each person at a tasting on  
          the licensee's premises, as specified.  





          EXISTING LAW:  


          1)  The enactment of the 21st Amendment to the U.S. Constitution  
          in 1933 repealed the 18th Amendment and ended the era of  
          Prohibition.  Accordingly, states were granted the authority to  
          establish alcoholic beverage laws and administrative structures  
          to regulate the sale and distribution of alcoholic beverages.  













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          2)  Establishes the Department of Alcohol and Beverage Control  
          (ABC) and grants it exclusive authority to administer the  
          provisions of the Alcoholic Beverage Control Act (ABC Act) in  
          accordance with laws enacted by the Legislature.  This involves  
          licensing individuals and businesses associated with the  
          manufacture, importation and sale of alcoholic beverages in this  
          state and the collection of license fees or occupation taxes for  
          this purpose. 





          3)  Grants licensed distilled spirits manufacturers and licensed  
          brandy manufacturers the privilege to conduct consumer tastings  
          on their licensed premises and to charge for those tastings, as  
          defined.  Allow distilled spirits manufacturers and brandy  
          manufacturers to charge individuals for up to six tastings, as  
          defined.  The single tastings of distilled spirits or brandy  
          shall not be given in the form of a cocktail or a mixed drink.  
          Existing law also makes it explicit that no distilled spirits  
          shall be sold or solicited for sale in that portion of the  
          premises where the distilled tasting is being conducted.





          4)  Permits an on-sale retail licensee of wine or distilled  
          spirits to conduct "instructional" consumer tastings on the  
          licensed retail premise provided the following conditions are  
          met: a) no more than a quarter ounce of distilled spirits is  
          offered in one tasting; b) no more than one ounce of wine is  
          offered in one tasting; and, c) no more than three tastings are  
          offered to an individual in one day.  An instruction may include  
          the history, nature, values and characteristics of the product  
          being offered, and the methods of presenting and serving the  
          product.  









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          5)  Permits a licensed winegrower or brandy manufacturer to be  
          issued an off-sale general license.  Existing law also permits  
          wineries to sell their products on the premises to consumers and  
          directly to licensed on-sale and off-sale retailers (e.g.,  
          restaurants and liquor stores).


          6)  A licensed beer manufacturer may, at the licensed premises  
          of production, sell to consumers for consumption off the  
          premises beer that is produced and bottled by, or produced and  
          packaged for, that manufacturer.  Licensed beer manufacturers  
          may also exercise any of the following privileges: 1) Sell that  
          beer to any person holding a license authorizing the sale of  
          beer; and 2) Sell that beer to consumers for consumption on the  
          manufacturer's licensed premises or on premises owned by the  
          manufacturer that are contiguous to the licensed premises and  
          which are operated by and for the manufacturer.


          7)  Provides for a brewpub- restaurant license, issued to a bona  
          fide public eating-place, which authorizes the sale of beer,  
          wine, and distilled spirits for consumption on the premises and  
          the sale of beer produced by the brewpub-restaurant licensee for  
          consumption on the premises.  The license also authorizes the  
          sale of beer produced by the licensed brewpub-restaurant  
          licensee to a licensed beer and wine wholesaler.  


          8)  Authorizes ABC to issue to the holder of an "off-sale"  
          retail license an "instructional tasting license" for the  
          purpose of furnishing tastings of alcoholic beverages to  
          consumers, subject to certain limitations.


          9)  Authorizes licensed winegrowers to conduct wine tastings  
          featuring their products either on or off the winegrower's  
          premises, as provided for in rules and regulations adopted by  
          ABC.








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          10)  Permits, until January 1, 2018, a manufacturer, winegrower,  
          rectifier, or distiller, distilled spirits manufacturer's agent  
          or any authorized agent of that person to provide, free of  
          charge, entertainment, food, and distilled spirits, wine, or  
          nonalcoholic beverages to consumers over 21 years of age at an  
          invitation-only event in connection with the sale or  
          distribution of wine or distilled spirits, as specified. 


          11)  Defines an "on-sale" license as authorizing the sale of all  
          types of alcoholic beverages: namely, beer, wine and distilled  
          spirits, for consumption on the premises (such as at a  
          restaurant or bar).  

          12)  An "off-sale" license authorizes the sale of all types of  
          alcoholic beverages for consumption off the premises in  
          original, sealed containers.  

          FISCAL EFFECT:  Unknown


          COMMENTS:  


           Purpose of the bill  :  According to the author, this bill will  
          remove the onerous restriction in law that prevents distillers  
          from selling their products to consumers.  Wineries and  
          breweries were not allowed to do so under original Prohibition  
          tied-house laws.  Over time, the Legislature created various  
          exemptions from the Tied-house law for beer and wine.  These  
          exemptions have helped small wineries and craft brewers make  
          some of the finest beer and wine in the world. AB 1233 is a  
          logical continuation of those efforts and changes in law.












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          The author states, the goal of this bill is to allow modest,  
          limited sales to establish artisanal distiller brands and use  
          tastings to teach the public about small batch, distilled  
          spirits products.  


          By allowing an initial sale at tasting rooms, the public can  
          take a product with them and share California brands.  Once that  
          relationship is established, the brand can travel with tourists,  
          as gifts and at gatherings, allowing the small distilleries to  
          grow.  When that next bottle is desired, the consumer will go to  
          a local retailer and ask for it by name.  





          According to information provided by the author's office,  
          currently, there are nearly 50 small craft distilleries across  
          the state where those of age have the opportunity to sample new  
          products, in modest quantities, in a responsible setting.   
          Tastings are limited to not more than six  of one-ounce taste  
          per individual, per day.  However, current law prohibits  
          California distilleries from selling any product other than  
          fruit-based brandies directly to consumers. Current law allows  
          fruit based brandies to be sold at their on-site tasting rooms.   
          AB 1233 would allow limited sales of distilled spirits from all  
          types of fermentable ingredients, such as grains, potatoes,  
          sugarcane, molasses and rice, to enable California distilleries  
          to sell not only brandy but also whiskey, vodka, gin, rum,  
          liqueurs and other specialty spirits.





          The author maintains that a stronger three-tier system that  
          links local consumers with local producers will emerge.  Today,  








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          40 states allow distillers to sell their products to consumers.   
          By allowing limited direct sales at tasting rooms, California  
          brands will grow and retailers will demand them for their  
          shelves to compete with large, out of state brands.


           


          Background  :  Existing law, known as the "Tied-house" law,  
          separates the alcoholic beverage industry into three component  
          parts, or tiers, of manufacturer (including breweries, wineries  
          and distilleries), wholesaler, and retailer (both on-sale and  
          off-sale).  





          Tied-house refers to a practice in this country prior to  
          Prohibition and still occurring in England today where a bar or  
          public house, from whence comes the "house" of tied house, is  
          tied to the products of a particular manufacturer, either  
          because the manufacturer owns the house, or the house is  
          contractually obligated to carry only a particular  
          manufacturer's products.   





          The original policy rationale for this body of law was to: (a)  
          promote the state's interest in an orderly market; (b) prohibit  
          the vertical integration and dominance by a single producer in  
          the marketplace; (c) prohibit commercial bribery and protect the  
          public from predatory marketing practices; and, (d) discourage  
          and/or prevent the intemperate use of alcoholic beverages.   
          Generally, other than exceptions granted by the Legislature, the  
          holder of one type of license is not permitted to do business as  








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          another type of licensee within the "three-tier" system.





          Numerous exceptions to these restrictions have been enacted  
          through the years in those specific instances where the  
          Legislature determined that the public's interests were  
          protected.  Generally, the business community is interested in  
          removing unnecessary business regulations and creating  
          conditions that facilitate investment and expansion  
          opportunities for companies that have some degree of ownership  
          in multiple segments of the industry.  However, the Legislature  
          traditionally does not grant exemptions that favor the products  
          of the entity seeking the exemption, or exemptions that unfairly  
          compromise the role of the distributors.


           Distilled spirits production is a growing market  :  According to  
          the Distilled Spirits Council of the United States, the  
          distilled spirits industry had steady growth in the United  
          States in 2014.  The Council reported that supplier sales were  
          up 4% in 2014 and total U.S. volume growth increased 2.2% to 210  
          million cases.  Consumer interest in industry innovations and  
          premium products from distilled spirits producers of all sizes  
          contributed to another year of steady growth in 2014.





          According to the American Craft Spirits Association, there are  
          at least 350 craft distilleries in the United States today - a  
          figure projected to pass 500 in 2015. The craft spirits industry  
          holds economic development opportunities in tourism,  
          manufacturing, revitalization, exporting and more.  Craft  
          spirits is a $10.2 billion market and growing fast.









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           Recent legislative action outside of California  : In 2008,  
          Washington allowed craft distilleries to conduct on-site tasting  
          and sales.  A craft distillery is authorized to sell product of  
          its own production for consumption off the premises, up to 2  
          liters per customer per day.





          In 2008, Oregon allowed craft distillers to offer samples of  
          their products at their distillery or at a separate tasting  
          room.  Additionally, distilleries can apply for a license as a  
          retail outlet agent to sell bottled products manufactured at the  
          distillery directly to consumers. 





          In 2013, Indiana passed legislation that allowed craft  
          distillers to sell a range of products directly to consumers by  
          the drink or bottle.





          In 2013, Florida passed legislation that allows distilleries to  
          sell two bottles a year directly to customers.  Craft  
          distilleries are defined as any distillery that makes less than  
          75,000 gallons a year on-site. 











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          In 2014, Arizona established a craft-liquor distillery license,  
          allowing them to sell directly to consumers.





           In support  :  According to the bill's sponsor, California  
          Artisanal Distillers Guild, this bill will repeal the  
          prohibition on small craft distilleries selling products other  
          than fruit based brandies at their on-site tasting rooms.  By  
          allowing the sale of up to three bottles per person at a spirits  
          tasting in a licensed distillery, will allow distilleries across  
          California, to sell distilled spirits from all types of  
          fermentable ingredients, such as grains, potatoes, sugarcane,  
          molasses and rice.  Similar laws for distilleries exist in 40  
          other states and California currently allows breweries and  
          wineries to sell all of their beers and wines in closed  
          containers to visitors of their tasting rooms.  





          Dry Diggings Distillery writes, "Direct sales will help small  
          distilleries create a market for our products and grow our  
          sector of the state's tourism and local "farm to fork" or "field  
          to bottle" movement. Tasting room sales will increase tax  
          revenue and help create demand for these craft products as we  
          compete against large, out of state distillery products for  
          retail shelf space."





          Proponents note that small business need the ability to attract  








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          consumers and to be able to sell to them directly at the place  
          of business - not being able to do so does not serve any purpose  
          of the law nor does it interfere with legitimate business  
          interests of others.





          Proponents further note "Prohibition-era California liquor laws  
          that hinder small craft distillers from expanding our operations  
          and growing our business should be repealed.  It was not until  
          January 2014 that we could even offer paid tastings at  
          distilleries like ours. It's now time to allow us to sell  
          directly to our customers, even if it is limited to only three  
          bottles."





           In opposition  :  The California Teamsters Public Affairs Council  
          writes, "The so called "Tied-house rules" may seem arcane but  
          they serve the dual purposes of protecting the public and  
          protecting businesses in the alcohol industry from being  
          monopolized.  When an alcohol manufacturer is able to control  
          all aspects of the market from the distillery to the consumer,  
          they can squeeze others out of the market and the result is less  
          consumer choice.  Of course, this also negatively impacts  
          everyone else in the industry as well.  The current regulatory  
          framework also contributes to stability in the marketplace,  
          which means job stability.  The Teamsters have thousands of  
          members in the industry and the sort of deregulation that this  
          bill promotes puts those members' jobs in serious jeopardy.   
          These are good middle class jobs with good benefits. Our concern  
          with this bill is that it will ultimately make these jobs  
          disappear.  We've seen it over and over again with  
          deregulation." 









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          The Wine and Spirits Wholesalers of California, Inc. writes,  
          "While the bill is intended to assist 'small' craft distillers  
          with promotion of their distilled spirits products, allowing  
          distillers to sell distilled spirts products directly to  
          consumers raises many public concerns which need to be  
          addressed: 1) There is no limit on the size of a distiller that  
          can sell directly to consumers. 2) The bill would change 90  
          years of post-Prohibition law regulating the direct sale of  
          distilled spirits at a distillery.  3) Distilled spirits  
          generally contain at least 4 times the concentration of alcohol  
          as wine, and 10 times as much as beer.  Which is why state  
          policy has always treated distilled spirits differently than  
          wine and beer. 4) Many craft distillers are located in urban  
          areas, unlike most wineries that are located in rural,  
          agricultural areas.  The bill provides no controls over  
          consumption of the distilled spirits after the purchase.  5)  
          Current law requires that wholesalers collect the excise taxes  
          due on distilled spirits sold in the state.  The bill makes no  
          provision for payment of excise taxes by distillers relating to  
          the direct sale to consumers. 6) The bill would create a number  
          of new "off-sale" alcoholic beverage premises in urban areas  
          without giving the public the ability to comment as they have  
          with other licensees.  





          The California Council on Alcohol Problems (CCAP) writes "We are  
          uncomfortable with the idea of distilled spirits (up to three  
          bottles) being sold by manufacturers at their manufacturing  
          facility as part of tastings events, opening up new venues for  
          the sale of alcoholic beverages.  As is typical with these  
          statutorily created, expanded venues for alcohol marketing and  
          distribution, what begins as a modest new avenue to market  








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          alcohol expands into ever-increasing ways to distribute and sell  
          these products.  Such is the case with this proposal vis-a-vis  
          tastings events at the manufacturer's facility, which will --  
          under AB 1233 -- be accompanied by product sales." 





           Policy consideration  :   According to information provided by the  
          author's office, a 2013 Report titled, "Sonoma County Craft  
          Beverage Report, stated "At the beginning of the 20th century,  
          U.S. distilleries numbered around 5,000, twenty years later,  
          barely a dozen remained.  The era of Prohibition not only  
          devastated the distillery industry of the early 1900s, it  
          brought about restrictive, federal and local laws that persist  
          today.  The regulations regarding in-store sales and tastings is  
          one of the more onerous laws for California craft distilleries.  
          Additionally, unlike beer and wine, spirits may not be made at  
          home for personal use.  Distilleries also face a federal tax  
          excise tax regardless of their size.  Will the number of  
          distilleries ever return to pre-Prohibition levels?  Future  
          growth will be influenced by how governments revise their  
          prohibition laws, and ultimately, the pace of consumer demand."





          The above statement summarizes the history and reasoning why  
          distilled spirits and distilled spirits manufacturers have been  
          treated differently both at the federal and state level as it  
          pertains to regulation, taxation, selling privileges,  
          restrictions and general oversight post-Prohibition.













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          In addition, the Committee might consider the following policy  
          questions: 1) Under the current version of the bill, is the sale  
          of the distilled product conditioned upon a tasting of the  
          product?   It certainly ties the sale to attendance "at a  
          tasting", which suggests that participation and consumption is  
          required.  As a practical matter, "tastings" at the distillery  
          are not an "event", but rather occur on an on-going basis while  
          the tasting room is open, so being "at a tasting" is ambiguous.  
          2)  Should the ABC and local officials have the right to review  
          and place certain conditions upon the exercise of a licensee to  
          conduct the direct sale privilege?  3)  Would the licensee be  
          subject to any type of reporting to the ABC due to this expanded  
          privilege?  4) Should the direct sale privilege be limited, like  
          other states to "small craft distillers" based on the amount  
          they produce?  5)  Should there be a limit on the amount of  
          product that can be purchased directly by an individual each  
          month?  6)  Should the bill include an additional permit and/or  
          license fee to ABC for regulation and enforcement of this new  
          privilege?  Requiring an additional license or permit might  
          provide an avenue for utilizing "normal" licensing procedures,  
          which could address concerns, raised in question two.  7)  Might  
          the bill be premature considering that just over a year ago,  
          legislation (AB 933, Chapter 366, Statutes of 2013) went into  
          effect that granted licensed distilled spirits and brandy  
          manufacturers an added privilege to conduct consumer tastings on  
          their licensed premises and to charge for those tastings?  The  
          author's office stated that the measure was carefully crafted to  
          give distilled spirits and brandy manufacturers a marketing tool  
          to educate current and future consumers while taking into  
          consideration California's three-tier system.  





           Prior legislation  :  AB 933 (Skinner and Hall), Chapter 366,  
          Statutes of 2013.  Granted licensed distilled spirits  
          manufacturers and licensed brandy manufacturers the privilege to  
          conduct consumer tastings on their licensed premises and to  








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          charge for those tastings, as defined.





          AB 2184 (Hall), Chapter 480, Statutes of 2012.  Permits, until  
          January 1, 2016, the appearance of a person employed or engaged  
          by an "authorized licensee," as defined, at a promotional event  
          held at the premises of an off-sale retail licensee for the  
          purpose of providing autographs under specified conditions.





          SB 1068 (Hancock), 2009-10 Session.  Would have added a new  
          provision to the ABC Act authorizing a licensed distiller that  
          distills fewer than 50,000 gallons of spirits annually to  
          self-distribute to consumers and licensed retailers  
          (restaurants, liquor stores).  (Held in Senate G.O. Committee at  
          author's request) 





          AB 605 (Portantino) Chapter 230, Statutes of 2010.  Added  
          provisions to the ABC Act authorizing the department to issue to  
          the holder of an "off-sale" retail license an "instructional  
          tasting license" for the purpose of furnishing tastings of  
          alcoholic beverages to consumers, subject to certain  
          limitations.





          SB 1022 (Strickland), Chapter 281, Statutes of 2010.  Expands an  








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          existing tied-house exception to enable licensed distilled  
          spirits "rectifiers" to donate or sell their products to  
          specified nonprofit entities for the purpose of assisting in  
          fund-raising efforts.





          SB 639 (Calderon) 2009-10 Session.  Would have created a new  
          on-sale tasting license to allow off-sale retail licensees to  
          furnish tastes of alcoholic beverages to consumers, as  
          specified.  (Died on Senate Appropriations Suspense File)  





          AB 2293 (De Leon), Chapter 638, Statutes of 2008.  Added a new  
          provision to the ABC Act authorizing distilled spirits  
          manufacturers and winegrowers to provide their product offerings  
          directly to consumers (free of charge) during invitation-only  
          events on premises for which a caterer's permit authorization  
          has been issued.





          SB 995 (Maldonado), 2007-08 Session.  Would have permitted  
          winegrowers, distilled spirits manufacturers, distilled spirits  
          rectifiers general, or distilled spirits importers general,  
          out-of-state distilled spirits shippers, and authorized agents  
          of any of the above to instruct consumers on the premises of an  
          off-sale licensee regarding wine and distilled spirits,  
          respectively, as provided.  Also, would have allowed the  
          instruction to include the furnishing of tastings under  
          specified conditions.  (Held in Senate G.O. Committee at  
          author's request.)








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          AB 2613 (Plescia), 2007-08 Session.  Would have authorized  
          winegrowers, distilled spirits manufacturers, as well as  
          rectifiers, importers and shippers of these beverages to offer  
          tastings of wine or distilled spirits at off-sale retail  
          licensed premises (grocery stores and liquor stores) in a  
          segregated area.  Also, would have required verification of age  
          at entrance to the segregated area and placed limits on tastings  
          (one-quarter ounce of spirits and one ounce of wine) and limited  
          tastings to three per person each day.  (Held in Assembly  
          Appropriations Committee)





          SB 1548 (Murray), Chapter 670, Statutes of 2006.  Authorized  
          beer manufacturers and wholesalers to offer beer samples (not to  
          exceed 8 ounces per person, per day) to individuals of legal  
          drinking age at on-sale retail licensed premises under specified  
          conditions.  





          AB 2285 (Valerie Brown), Chapter 248, Statutes of 1998.  Allows  
          on-sale retail licensees to offer limited tastings of wine or  
          distilled spirits at the licensed establishment.





          SB 993 (Burton), Chapter 544, Statutes of 1997.  Among other  








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          things, authorized a licensed distilled spirits manufacturer to  
          conduct tastings of distilled spirits on the licensed premises  
          under specified conditions.  





          SB 113 (Thompson), Chapter 238, Statutes of 1993.  Permits a  
          licensed winegrower to sell wine and brandy to consumers for  
          consumption off the premises or for consumption at a restaurant  
          located at the winery or immediately contiguous to it.  A  
          winegrower must produce on the licensed premises not less than  
          50% of the wines sold to consumers.


          


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Artisanal Distillers Guild


          Charbay Distillery & Winery


          Dry Diggins Distillery


          El Dorado Hills Chamber of Commerce










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          Sonoma County Distilling Company


          Spirit Works Distillery


          Ventura Limoncello Company, LLC.


          Venus Spirits


          3 letters from General Public




          Opposition


          California Council on Alcohol Problems


          California Teamsters Public Affairs Council


          Wine and Spirits Wholesalers of California, Inc.




          


          Analysis Prepared by:Eric Johnson / G.O. / (916) 319-2531












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